Initial Interest Rate

What is a Initial Interest Rate?

The interest rate that applies on the first day of a loan’s term. It may also be called a start rate, an introductory rate, a promotional rate, or a teaser rate. At some point during the loan’s lifetime, this rate may adjust or reset.

More On Initial Interest Rate

The initial interest rate is the interest rate that applies on the first day of a loan’s term. It may also be called a start rate, an introductory rate, a promotional rate, or a teaser rate. At some point during the loan’s lifetime, this rate may adjust or reset.

ARM Rates

The initial interest rate for an adjustable rate mortgage (ARM) might be in effect for one month to ten years, depending on the loan type. For example, a 1-year ARM’s initial interest rate is fixed for one year. A 5/1 ARM’s initial rate is fixed for five years, and so on.

Calculating Initial Rate

In general, the shorter the introductory period, the lower the intro rate, and the longer the introductory period, the higher the initial rate. When 3/1 ARM rates are 2.5 percent, for example, 5/1 ARM rates might be 2.875 percent and 7/1 ARM rates might be 3.0 percent.

How ARMs save you money

ARMs with low initial interest rates can save borrowers a lot of money, especially if they don’t expect to own their home or have their mortgage for many years. The difference between interest rates for 30-year fixed mortgages and 5/1 ARMs is generally about one percent, and there is little point in making a substantially higher payment for 60 months if the borrower doesn’t expect to own the home in six or seven years.